Paper wealth is taxed on paper. The IRS wants cash.
How does the alternative minimum tax hit incentive stock options?
Exercising an incentive stock option creates no regular taxable income. It does create an alternative minimum tax adjustment, equal to the spread between what you paid and the share value on the exercise date.
The IRS states that you “may be subject to alternative minimum tax in the year you exercise an ISO” [Source: IRS Topic 427]. Form 3921 reports the dates and values.
The exemption is the buffer, and it shrinks as income rises.
| 2026 AMT figure | Unmarried | Married filing jointly |
|---|---|---|
| Exemption amount | $90,100 | $140,200 |
| Phase-out begins at | $500,000 | $1,000,000 |
[Source: IRS 2026]
California runs a parallel system. Schedule P (540) computes the state tentative minimum tax at 7.0 percent, and line 10 of that form is reserved for incentive stock options and California qualified stock options [Source: FTB Schedule P 540, 2025]. The Franchise Tax Board instructs taxpayers to treat ISO shares “as if the option were a nonstatutory stock option” for AMT purposes [Source: FTB Publication 1004]. Planning before an exercise beats cleanup after one.
Why is RSU withholding short of the tax you actually owe?
Because the withholding rate and your marginal rate are two different numbers. RSU vesting is treated as supplemental wages. Employers commonly withhold at the flat statutory rate, which sits well below the top bracket.
The IRS confirms that “the withholding rate on supplemental wages remains 22%,” rising to 37 percent only after supplemental wages exceed $1 million in a calendar year [Source: IRS Publication 15, 2026].
| Rate | Percentage | Applies at |
|---|---|---|
| Federal supplemental withholding | 22% | Supplemental wages up to $1,000,000 |
| Top federal marginal rate | 37% | $640,600 single, $768,700 joint (2026) |
| Top California marginal rate | 12.30% | $742,953 single, $1,485,906 joint (2025) |
A large vest withheld at 22 percent against a 37 percent bracket leaves a real April balance, before California. That balance accrues penalties and interest, and unpaid back taxes move into collection.
Does California follow the federal QSBS rules in section 1202?
No. This is one of the sharpest conformity gaps a Palo Alto founder meets. The Franchise Tax Board states plainly that “California does not conform to the qualified small business stock deferral and gain exclusion under IRC Sections 1045 and 1202” [Source: FTB Schedule D 540, 2025].
Federally, section 1202 excludes gain on qualified small business stock “held for more than 5 years” [Source: IRS PLR 202418001]. For stock acquired after July 4, 2025, the IRS says “the aggregate amount of excluded gain per issuer goes up to $15 million” [Source: IRS 2026].
So a sale can be largely tax free federally and fully taxable to California. Entity and equity structuring choices made years earlier drive that result.
What happens when a founder owes tax but has no cash?
The same collection machinery applies, however illiquid the shares. In general, the IRS assesses the tax, issues a bill, and then pursues payment. Two formal paths exist.
For individuals, a long-term online payment plan requires a balance of “$50,000 or less in combined tax, penalties and interest,” while a short-term plan of 180 days or less allows under $100,000 [Source: IRS 2026].
Settlement is harder. In fiscal 2025, taxpayers submitted 38,797 offers in compromise and the IRS accepted 5,464 of them, totaling $98.1 million [Source: IRS 2025]. A tax attorney can assess whether a case fits an installment agreement or an offer in compromise, and neither outcome is ever guaranteed.
Prevention sits earlier in the timeline. A section 83(b) election “must be filed no later than 30 days after the date the property was transferred,” and it “may not be revoked except with the consent of the IRS” [Source: IRS Form 15620].
What does the FTB check when you leave California after a liquidity event?
Residency and sourcing, as two separate questions. Leaving does not automatically end California’s claim on income earned here.
California defines a resident as anyone “present in California for other than a temporary or transitory purpose,” or domiciled here while temporarily away. The employment safe harbor generally requires an outside-California contract of at least 546 consecutive days, intangible income under $200,000, and return visits of no more than 45 days a year [Source: FTB Publication 1031, 2025].
Sourcing is separate. For nonresidents, California allocates option wage income using “California workdays from grant date to exercise date divided by total workdays from grant date to exercise date” [Source: FTB Publication 1004]. Facts govern every case, so this is general information. State tax debt follows its own collection track.
How does a federal tax lien affect Palo Alto real estate?
It clouds title, and in this market that stops deals. The IRS files a Notice of Federal Tax Lien once tax is assessed, billed and unpaid, and it “attaches to all of your assets” [Source: IRS 2026].
Internal guidance directs filing where “the aggregate UBA is $10,000 or more” [Source: IRM 5.12.2.6]. Under IRC 6323(f), the notice goes to the office the state designates in the county where the real property sits, which in California is the county recorder [Source: IRM 5.17.2].
For Palo Alto property, that office is the Santa Clara County Clerk-Recorder, which records “statutory liens (tax liens, mechanics liens)” [Source: Santa Clara County Clerk-Recorder]. Palo Alto carried a net assessed value of roughly $51.9 billion on the 2024-2025 roll [Source: Santa Clara County Assessor 2024]. A lien at those values can halt a refinance or an escrow. The IRS releases the lien within 30 days of full payment, and a resolution attorney can also pursue withdrawal or subordination. Unpaid balances can also reach a bank levy.
Where does a Palo Alto tax attorney handle an IRS case?
Locally for administrative work, in San Francisco for litigation. The IRS runs a Taxpayer Assistance Center at 55 S. Market St., San Jose, CA 95113, by appointment [Source: IRS].
Tax Court is different. The court lists no place of trial in San Jose. The nearest California sitting for Bay Area petitioners is San Francisco, at the Phillip Burton Federal Building, 450 Golden Gate Ave, Room 2-1408 [Source: US Tax Court].
Deadlines are strict. A petition “must be filed by the 90th day (or the 150th day if the notice is addressed to a person outside the United States) from the date of the mailing of the notice of deficiency” [Source: US Tax Court]. Tax Court practice requires separate admission, which is why audit and litigation representation belongs with an attorney.
How Kim & Rosado helps Palo Alto clients
The firm serves Palo Alto clients from its San Jose office at 408-290-0280. That office sits near both the Santa Clara County Clerk-Recorder and the San Jose Taxpayer Assistance Center, where Palo Alto lien and collection files land.
This page covers Palo Alto specifically: equity, founders, conformity gaps and county-recorded liens. For salaried engineering compensation more broadly, start with tax help for tech workers in San Jose.
Nicholas Rosado, Anthony Kim and Peter Chang handle audits, collection and litigation, and several attorneys at the firm are former IRS attorneys. The San Jose tax attorney team works the administrative file and the court file together.
Frequently asked questions
Does exercising incentive stock options always trigger AMT?
No. Exercising an ISO creates an AMT adjustment, not an automatic AMT bill. Whether tax results depends on the size of the spread against the exemption and the phase-out. For 2026 the exemption is $90,100 for unmarried filers and $140,200 for joint filers, phasing out from $500,000 and $1,000,000 respectively. California applies its own 7.0 percent calculation on Schedule P (540). A tax attorney reviews the full picture rather than the grant alone.
Can the IRS record a lien against a Palo Alto home for equity tax debt?
Yes, in general. A federal tax lien arises once the IRS assesses tax, sends a bill, and payment is not made in full. Internal guidance points toward filing a notice when the aggregate unpaid balance reaches $10,000 or more. For real property in Palo Alto, the notice is recorded with the Santa Clara County Clerk-Recorder, so it appears in a title search. The IRS releases the lien within 30 days of full payment.
If I left California after an IPO, can the FTB still tax my equity?
Possibly. Residency and income sourcing are two different tests. California taxes nonresidents on wage income to the extent services were performed in the state, and Publication 1004 describes a workday allocation running from grant date to exercise date. Separately, the Franchise Tax Board reviews whether a departure ended residency at all, weighing factors such as where a spouse and children live, the principal residence, and licensing and registration. Outcomes turn on specific facts, so this is general information rather than advice.
Getting help
Equity tax problems rarely stay small. A balance from one vest or exercise compounds through penalties, then a notice, then a recorded lien. Acting early generally leaves more options open.
To discuss a Palo Alto equity or collection matter, schedule a 30 minute consultation or use the contact page.
